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Friday, January 21, 2005

Investment Idea: Sina

Following the close today, I read a comment that for the first time since 1977, the Dow, S&P 500 and Nasdaq have all traded down for each of the first three weeks in January. Year-to-date stats are: Dow -4%, S&P500 -4%, and the more volatile Nasdaq -7%. If this downward movement defines a trend for the year, we should brace ourselves for some tough months ahead. However, situations like this one also present opportunities to do a little "shopping." By the miracles of investor over-reaction and short-term profit-taking or loss-cutting (as the case may be), there often are companies whose shares become available at irresistably cheap levels.

One such company I have been eyeing for some time is Sina (SINA), the leading Chinese Internet portal. (Disclosure: I'm long and considering buying more shares.) A long list of positives attract me to this company:

* Long-term economic growth of China: 9% annual GDP growth may be slowing to 7%, but China is still the fastest growing economy in the world and has many years of growth ahead as it transitions from a managed to a market economy;* Chinese Internet usage: Projections are that in 2005 or 2006, China will have more Internet users than any other country, and that will be when penetration is still only 15% or so;* Market leader: Sina is the most popular Chinese Internet portal among the field including Sohu, NetEase and Tom Online. As market leader, Sina is favored by major players (note recent deals with Yahoo for auctions, NCsoft for games, Microsoft for Outlook SMS) seeking a partner in China;* Summer Olympics: Over the next three years, the upcoming 2008 Summer Olympics will attract more attention to China, and Sina should benefit from more advertising revenue and growth as a result;* Currency revaluation: The U.S., Japanese and other governments have been pressuring China to remove the peg of the RMB (currently said to the undervalued by 40%) to the dollar. While revaluation may be unlikely to occur this year and could wreak havoc on the Chinese economy when it does occur, profits from operations in China will see a windfall gain from appreciation of the RMB when translated into dollars;* Low PEG: Analysts' estimates show 5-year projected earnings growth of 37% annually for Sina (vs. 11% for the S&P 500). Currently trading at a forward PE of 17 ($25.57 close, $1.47 Dec-2005 earnings estimate), Sina's PEG ratio is less than 0.5!;* Upside: Analysts' average 1-year target price is $37, which would give about 50% upside if realized.

What's the downside? Well, anything is possible--maybe an earnings miss, increased competition and pricing pressure, loss of market leadership, a significant and protracted economic slowdown, tighter government controls, more insider selling, accounting problems. . . . Yet, given the robust growth and momentum of Sina's business and management's track record of positive earnings surprises in each of the past four quarters, it seems unlikely that a disaster in near. I gauge downside as being around last summer's low of $20 (PE of 13) and upside as high as $50 (PE of 35). From the current trading level of $25, this gives an attractive upside-downside ratio of 5:1.

While profit is never guaranteed in equity investing, at current price levels I am willing to make an educated bet on the long-term growth, profitability and success of Sina. A safe way to play is to check our investment thesis against the upcoming 2004Q4 earnings release (should be around Feb. 1), before loading up the truck, as they say.

The company announced 2004Q4 earnings of $0.30 today (Feb. 7), missing the consensus estimate of $0.31 by a penny. The more important news was a lower revenue outlook: Sina is now projecting 2005Q1 revenue of $43 million to $47 million, far short of analysts' prior estimates of $57 million.

1. The Chinese government has issued a notice prohibiting radio and TV commercials relating to "fortune-telling," effective end of January. This regulatory move has halted Sina's promotional campaign for its SMS product;

2. Changes at China Mobile (new billing system implemented in January and platform migration) will reduce Sina's MMS revenue.

#1 was "new" news; #2 was "old" news. Both SMS and MMS have been drivers of Sina's mobile value-added services revenue, which the company is now projecting to be sequentially lower by 20% to 30% in 2005Q1.

As a result, in after-hours trading today, the stock has plunged 20% to $22 a share.

My read of the situation is that Big Brother-like forces (both the Chinese government and the giant mobile operator, China Mobile) are exerting pressure on the little guys (Sina, Sohu and other Chinese internet companies)--as might be expected along the rocky road from communism to capitalism. The conservative older generation mandarins in Beijing apparently do not like to see the younger breed thrive at the new game of entrepreneurship, or at least feel that they must keep the rules of the game under tight control.

At this point, I continue to believe that the future is bright for Sina. There is a huge and growing market to tap and Sina is best-positioned among the Chinese internet companies to profit as China goes online. With bad news out and sentiment low, I suspect that we are very close to a price bottom today and will be looking to add to my position if I see consolidation over the weeks ahead.

I will be listening to Sina's conference call this evening for further information.

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